Another Reason To Avoid LLCs
Another Reason To Avoid LLCs

As I've explained several times earlier, the current fad for business entities is the LLC (Limited Liability Company), which is treated basically the same as an S corp for tax purposes. Almost every day, on the AskMe.com question boards I review, there is some idiot who set up an LLC because he heard it was the cool thing to do and now wants to know how it works. I am constantly referring people to my page on the differences between S & C corps, which applies to LLCs as well.

Those issues are still as relevant as ever. Another one is the fact that some jurisdictions (states) are charging extra taxes on LLCs. The People's Republic of California (PRC), for example, charges $800 per year plus an additional tax (currently up to $9,377) based on the company's gross (not net) income. I just finished preparing an LLC return where there was a net loss of over $80,000. There was obviously no Federal tax because IRS only taxes the net income. However, because the gross sales were over a million dollars, the PRC tax was $7,051.

This is another reason why I have never liked the idea of reporting expense reimbursements as income on tax returns. Most cities also assess their business taxes based on gross revenues. Showing the reimbursements as negative amounts in the expense section avoids overly inflating the revenues, and thus minimizing any taxes & fees based on them.

Why would there be such a tax on LLCs? This is not a theory, but fact based on personal meetings with some of the PRC rulers in Sacramento. They have a mindset that anyone who owns an LLC or an S corp is filthy rich and can afford to pay any taxes they decide to levy. I can still remember Johan Klehs, an Assemblyman from Hayward answering our question as to why they were charging S corps an extra tax. "Because they can afford it" was his exact quote. I have heard that from several other politicians in the PRC and even here in the Arkansas Ledge in Little Rock.

With California's current budget crisis, with a projected deficit of at least $4 billion, you can expect the taxes on LLCs and S corps to be a very enticing target for increase. It was for this very reason, the control of the State by high taxers, that I decided to leave the PRC after 38 years there.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/27/2002 03:49:00 PM Send this post: